A veteran investor recently recommended investors to buy “bruised blue chips”. He was purportedly referring to the consumer goods manufacturers that have underperformed in the year 2024. For reference, Nifty FMCG index is down 0.3% YTD2024 against ~14% rise in Nifty50. Historically in India, the FMCG sector had mostly outperformed the benchmark indices. Intermittent short periods of underperformance were traditionally seen by the long-term investors as an opportunity to buy/add FMCG stocks to their portfolio.
However, the trend seen in the past one decade (reasonably long period in my view) seems to be defying this conventional wisdom. Since 2014, Nifty FMCG has yielded a return of ~236% against a rise of 305% in Nifty 50. Thus, the conventional wisdom of preferring consumer goods manufacturers may not have been a great investment strategy, even accounting for the higher dividend yield in consumer stocks.
In my view, the underperformance of traditional FMCG blue chips is structural and may continue in future also. There are several factors which support this view of mine. For example—
· I believe that in the Indian consumer market, the balance of power has shifted from the large pan India producers/brand owners (mostly colonial era legacy monopolies) to technology partners (e.g., Quick Commerce, Ecommerce), logistic partners (Modern Retail, Warehousing, Transportation, Payments), regional producers/brand owners (especially for ready to eat food and snacks catering to local tastes and dairy), financiers (consumer finance), scaled up ancillary units catering to multiple brands (contract manufacturing, packaging, digital marketing etc.). The scalability, growth prospects and profitability are much higher in most of these new/emerging “consumer” businesses.
· The composition of the spending on FMCG basket has seen a conspicuous shift in the past one decade. The current FMCG basket includes a large portion of consumer services, e.g., Data, Food Delivery Services, Beauty and Personal Care Services, Healthcare (Diagnostics, Insurance, Clinic), Air Travel, Quick Service Restaurant (QSR), etc. The share of goods, earlier considered discretionary, like Alcohol, Transportation and Cooking Fuel, Packaged Ready to Eat Food, Fashion Accessories, etc. has also increased materially in the middle-income households’ non-discretionary consumption basket.
· It is estimated that the share of the items traditionally considered “discretionary” in the India consumption basket may increase 3x from 13% in 2000 to 39% in 2030. The stock market is obviously interested in growth (discretionary consumption), moving away from de-growth (staples).
· In a few years, some of the food delivery services providers, quick commerce platforms, QSR chains, beverage bottlers, traditional sweets & snacks brands may become bigger, more popular and fit the “Buffet Investment Criteria” better than the traditional FMCG brand owners/producers.
I shall therefore not be in a hurry to buy the 2024 underperformers; for some of these might be damaged, not just bruised.
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